It’s too early to tell whether the recent stabilisation of credit quality at major Southeast Asian companies marks a shift towards more conservative balance sheets, according to S&P Global Ratings.

On average, leverage (debt-to-Ebitda ratio) appears to have stabilised. Debt increased for 100 of the region’s 150 largest listed companies. These companies are mainly in the construction, telecommunications, diversified, and real estate sectors. But at the same time, earnings have slightly recovered over the period. Given improved earnings, the average credit quality of the 150 companies we surveyed has broadly stabilised despite higher absolute debt levels.

In our sample, median leverage was 2.4x in 2016, unchanged from 2015, with one-third of companies' leverage below 1.0x, one third between 1.0x and 5.0x, and one-third above. Likewise, aggregated leverage was essentially flat at 2.9x.

Although overall leverage appeared stable in our sample based on these numbers, leverage of half of the companies fell in 2016 and 2017 year-to-date, meaning leverage grew for the other half. So we are yet to see a consistent shift towards more conservative financial policies at Southeast Asian companies.

Do leverage trends differ across geographies?

The median leverage of the largest domestic companies appears to be stabilising in most countries, with the exception of the Philippines and Thailand.

Philippine and Singaporean companies had about 2x more leverage on aggregate than those in Indonesia. They also had nearly 50% more leverage than those in Malaysia and Thailand. These numbers remain consistent year-on-year. Singapore stands as the "champion" of indebtedness, due to still-modest operating conditions for the real estate and oil- and gas-related sectors, combined with persisting spending and sticky dividends (about 35% of Ebitda for the largest 100 listed companies in the country, compared to 25% on average across Southeast Asia). In the Philippines, the dominant diversified groups continue to spend aggressively on expansion and acquisitions, so leverage has continued its upward trend.

We believe ease of access to funding remains a key factor in leverage. Singapore, Philippines, Malaysia, and Thailand all have active and liquid local banking and capital markets. We also see that leverage tends to be above average among the most active issuers in these markets.

Do credit quality trends vary across industries?

Sectors have displayed different trends in the past 12 months, and we expect their credit dynamics to continue to vary.

Thailand's sector exposure reflects the country's developed chemicals, refinery, and oil and gas industries, and the importance of tourism in the country's economy. Real estate remains a key economic contributor across Asean, especially in Singapore, together with telecommunication companies. Heavy industries, often government related, set the scene in Malaysia, while diversified groups dominate in the Philippines.

Based on their sectoral exposure, we believe the countries likeliest to see credit quality deteriorating in the next 12 months are the Philippines and Thailand, with Malaysia, Indonesia, and Singapore being potentially more stable.

Is debt rising for Asean’s largest non-financial government-linked companies (GLCs)?

Balance sheets and credit ratios deterioration have been among the fastest and the most widespread for those companies in the region. Aggregate debt has nearly doubled over the past five years for the 52 large GLCs that S&P Global Ratings reviewed, and growth in debt outpaced that in profits. We estimate that the median net-debt-to-EBITDA ratio is approaching 3.0x across the 52 GLCs we reviewed, compared with less than 1.0x in 2011.

Annual spending at the largest non-financial GLCs in the region was up about 40% between 2011 and 2016 as they sought to implement their respective governments' policies. And that is just a start. The Asian Development Bank estimates that Southeast Asia needs to spend almost US$185 billion annually in miscellaneous infrastructure through 2030.

What’s the credit outlook for these GLCs?

Balance sheets are likely to erode further through 2018 as investment appetite remains high. Sustained spending may take its toll on the stand-alone credit profiles of these companies and they will require sizable external funding. As investments are often long-dated and do not generate immediate cash flows, we believe GLC balance sheets, which have weakened since 2011, will deteriorate further over the next three years at least. And that makes credit quality increasingly dependent on the willingness and ability of governments to support weaker GLCs.

So far, fund raising has not been an issue for GLCs as lenders implicitly assume governments will support entities they own majority regardless of their operations. But we believe government support will remain highly selective and limited to those GLCs providing a critical service to the economy rather than to those who operate in competitive markets.